It Looks Like It Is Time To Consider Achillion

My last article on Achillion (NASDAQ:ACHN) offered my opinion that ACHN might be more of a trading stock than an investment. While recent developments support that opinion, I also am seeing some very clear signs that ACHN is not just a trading stock, but a long term investment as well.

The "smart money" seems to be adding shares, not selling them. In fact, the largest holder of ACHN stock has not sold one single share and has increased its holdings by over 10%. The hedge fund that owns more than 10% of all outstanding shares of ACHN is QVT Associates, a privately owned hedge fund, run by Daniel Gold.

More on that later, but it is the foundation of my bullish opinion.

Perhaps the most difficult decision that an investor faces when deciding to buy a small-cap biotech stock is; when is the best time to finally plunk down the money. Of course we do not want to be too early, and obviously we do not want to be too late. We base our decisions on various bits of information.

The share price right now as it relates to the recent history of the price.

Analyst upgrades or downgrades based on the valuation of the stock OR any recent events.

What the "insiders" are doing; holding, selling, or buying even more shares.

Progress on clinical trials in various stages of the company pipeline.

Recent FDA Issues Have Impacted The Share Price

Achillion has recently run into a speed bump on one of its early clinical trials (Phase I) of a drug-drug interaction between ritonavir-boosted atazanavir showing elevated liver enzymes, causing sovaprevir being placed on clinical hold by FDA. While this is obviously a setback, investors should remember that the other clinical trials that ACHN has ongoing with sovaprevir are moving forward, as noted in this press release:

The FDA has allowed continued enrollment and treatment of patients in the Phase 2 -007 clinical trial evaluating 12-weeks of sovaprevir in combination with ACH-3102 and ribavirin for patients with treatment-naive genotype 1 hepatitis C viral infection (HCV).

"Today, Achillion announced that on Friday, June 28, the FDA made a written request for additional information regarding sovaprevir, Achillion protease inhibitor being investigated for the treatment of chronic HCV. The request was prompted by elevations in liver enzymes that we noted and reported to the FDA when sovaprevir was dosed in combination with ritonavir-boosted atazanavir, a commonly prescribed HIV treatment.

......So aside from the issue that we have seen in terms of increased sovaprevir exposures in the DDI trial, there have been no other issues in terms of safety with sovaprevir or any other trials that we are conducting.

Both the negative results as well as the ongoing positive clinical trials have been clearly outlined, and I would suggest that you refer to both the press release and the special conference call, as I have noted above.

The Share Price Has Dropped But Insiders Are Buying

Since my last article, the share price has dropped significantly.

(Click to enlarge)

As of the writing of this article, the share price stands at $7.01/share which reflects a drop of about 20% since the FDA news event was released. From my experience with small cap bio-tech companies, when the FDA puts a hold on a drug in trial stages, the company could suffer a fatal blow, and face an extended period of weak share prices, and large investors virtually walking away from the company and the stock.

In this particular case, the single largest investor of ACHN stock, QVT Associates, has been aggressively BUYING MORE shares.

QVT has not sold one single share and being an "insider" with holdings of more than 10% of all outstanding shares, had to file with the SEC this past week as to their open market purchases.

The total current holdings of QVT now stands at roughly 14 million shares which now constitutes more than 11% of all outstanding shares. That means QVT has added more than 10% to its existing holdings.

QVT Has Had An Impressive Track Record

Plenty of investors have heard of some of the really huge hedge fund leaders like Carl Ichan, but not that many have the name Daniel Gold on the tip of their tongues. Last year, Forbes ran this article showing that Gold and QVT was number 21 in the top 40 of all hedge fund managers, and while Gold is Managing Partner and CEO of QVT, his income is based on performance, and earning $100 million in earnings is indicative of a very successful hedge fund manager, and hedge fund. He has not had too many losers suffice it to say.

In this article, a solid overview of how QVT has gotten behind ACHN, with the initial purchase of shares, can be read, but briefly:

Most recently, QVT struck a deal with Achillion Pharmaceuticals, Inc. (NASDAQ-ACHN), purchasing 6.38 million shares valued at $41 million in total. The company is yet to start generating revenue from its flagship products, but late-phase drugs are on tap in the company's pipeline. The direct offering will help improve the balance sheet for the company as it progresses through a number of late-stage drug trials.

The initial purchase works out to just about $7.00/share, and now the shares held total more 14 million, at various price points. I believe that not only is the initial purchase of critical note, but all ensuing share purchases by QVT of ACHN shares through today.

The last time QVT had similar share purchase activity was in 2010 when QVT kept buying shares of Medivation (NASDAQ:MDVN) and sold many shares about one year later after the share price more than doubled. The most recent transactions can be viewed right here.

The QVT fund has continued to hold a smaller position in MDVN and the current share price is now about $56.00/share.

The point is not that QVT bought or sold quite timely, it is that they were buyers when others were sellers. The same seems to be true with ACHN. There are reasons why the investment world labels "smart money" as "smart money". Given the issues with the FDA and the risk potential evident in this stock and company, the largest shareholder of ACHN is a BUYER, not a SELLER, it seems like this is the "smart money".

Let it also be known that QVT is not the only major holder of ACHN shares as this article reports:

Hedge funds have recently been bullish with regards to ACHN, with four funds substantially increasing their holdings. Daniel Gold's QVT Financial currently has the largest stake in the company, increasing its investments by 11% up to a total value of $56 million. Ra Capital Management has also increased its position by nearly 30% up to $21.5 million; it makes up over 7.5% of its entire 13-F portfolio. While these two hedge funds have both been bullish on ACHN, the largest increase in holdings from last quarter came from James Flynn's Deerfield Management, which upped its stake in ACHN by 147% with a total value of just over $11 million. This bullish behavior from the smart money, combined with the unveiling of ACHN's new drug, could make for a strong showing by the stock in the future.

My Opinion

With shares currently trading at a sharp discount since my prior articles, I now believe that this stock is more than a trading stock. The risks to shareholders are based within the progress of the drugs in the clinical trial pipeline as of now. If the heart of the drug pipeline, sovaprevir, is deemed to be of no value in the treatment of hepatitis C, OR if there are so many negatives that the positive effects are overshadowed, the share price would crater.

That being said, the evidence thus far, aside from this limited FDA hold, has been quite promising.

The opportunities are quite clear to base my bullish opinion upon.

A pipeline of drugs that have progressed well during all clinical trials, aside from the limited hold of just one trial.

A clean balance sheet with $144 million in cash and less than $1 million in debt.

The obvious potential for this company to be bought out by a larger pharmaceutical company at a premium to today's share price.

The hepatitis C drug market, which is estimated to be roughly $20 billion, offers plenty of room for more than one or two other major players to profit from.

While shares could be purchased for a short term profit, (or loss if the entire pipeline fails), I believe the real gains will be seen with a long term risk position in this stock.

I still believe that the company can be bought out, and guess which hedge fund has successfully brought mergers and acquisitions together, that also happens to be the single largest shareholder of ACHN: QVT.

Disclosure: I am long ACHN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions of the author are NOT recommendations to either buy or sell any security, and the risks involved with small cap bio-tech stocks are much greater than the well known mega cap blue chip stocks that can be owned. Please do your own research prior to making any investment decisions.

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